Georgian Oil and Gas Corporation JSC. Consolidated Financial Statements for 2017

Transcription

1 Consolidated Financial Statements for 2017

2 Contents Independent Auditors Report 3 Consolidated Statement of Financial Position 8 Consolidated Statement of Profit or Loss and Other Comprehensive Income 9 Consolidated Statement of Changes in Equity 10 Consolidated Statement of Cash Flows 11 Notes to the Consolidated Financial Statements 12

3 KPMG Georgia LLC 5th Floor, GMT Plaza 4 Liberty Square, 0105 Tbilisi, Georgia Telephone Internet Independent Auditors' Report To the Board of Directors of Georgian Oil and Gas Corporation JSC Opinion We have audited the consolidated financial statements of Georgian Oil and Gas Corporation JSC (the "Company") and its subsidiaries (the "Group"), which comprise the consolidated statement of financial position as at 31 December 2017, the consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in Georgia, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Kc~ Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Please refer to Note 14 in the consolidated financial statements. KPMG Georgia LLC. a company Incorporated under the Laws of Georgia. a member firm of the KPMG netwoll< of independent firms affiliated with K PMG International Cooperative rkpmg lntematk>oar), a Sw,ss entity.

4 Independent Auditors' Report Page 2 The Key audit matter How the matter was addressed in our audit During 2017, the Group revised the estimated unguaranteed residual value of the finance lease receivable amounting to 62,873 GEL thousand at 31 December This revision involved certain critical judgements m respect of the assumptions made which are inherently uncertain. Due to the above and the significance of the Finance lease receivable balance, the carrying value of the Finance Lease Receivable is a Key Audit Matter. Changes to the key assumptions included a decrease in the discount rate used to calculate the present value of the unguaranteed residual value of the finance lease receivable and a decrease in projected cash flows from transit fees produced by these assets. We have analysed the Pipeline construction and operating agreement, dated 8 March, 1996 that stipulates the main terms of the finance lease and reconciled the assumptions and inputs used in the calculation of the unguaranteed residual value of the finance lease receivable with respective contractual provisions. Namely, we checked that the nature of assets leased out to the lessees, lease commencement and termination dates were correctly reflected in the calculation of the residual value of the finance lease receivable. We have also compared the date of transfer of the leased assets to the Group detailed in the calculation of the unguaranteed residual value with respective orders of the relevant Government agency, LEPL Enterprise Management Agency. We assessed the reasonableness of the revised assumptions made by the Group as follows: we agreed the recalculated the incremental borrowing rate used by the Group to calculate the present value of the unguaranteed residual value of the finance lease receivable. We have involved our valuation specialists to assess whether the discount rate applied in the cash flow forecast was in line with international valuation standards and accepted market practice. In addition, we evaluated management's cash flow forecast by comparing projected cash flows from transit fees to actual cash flows from transit fees in Property, plant and equipment (PPE) register accurac~ Please refer to Note 12 in the consolidated financial statements The Key audit matter How the matter was addressed in our audit The Group has a significant number of items of PPE (approximately 6 thousand items) spread across Georgia that are not always under the physical control of the Group due to the nature and location of the assets. The Group acquires a significant amount of assets on a recurring basis for various capital projects. The Group has a significant amount of assets under construction and as uninstalled equipment. The PPE register is an Excelbased application that is not Our audit procedures to address the Key Audit matter included the following: - Assessing the Group's capitalization policy for expenditure relating to PPE with reference to the requirements of IFRS; - Assessing, on a sample basis costs capitalized during the year by comparing the costs capitalized with the relevant underlying documentation, which included purchase agreements and invoices, and assessing whether the costs capitalized met the relevant criteria for capitalization; - Challenging the date of transferring construction in progress to PPE by examining the inspection reports, on a sample basis; - Evaluating management's estimation of the carrying value of PPE uninstalled for longer than 24 months by

5 Independent Auditors' Report Page3 integrated with the Group's accounting software. The Group does not have formalized controls over the accuracy of the register and over the reconciliation between the register and the accounting software. The PPE register contained errors in respect of additions, disposals and depreciation. Due to the above and the significance of the PPE balance, the accuracy of PPE is a Key Audit Matter. collecting corroborative evidence from Group's technical personnel and considering our knowledge of the business; - Evaluating management's estimation of useful economic lives by considering our knowledge of the business and practices adopted in the wider oil transportation industry; - Testing the accuracy of the opening balances of the PPE register items by means of reconciling them with the financial records of prior periods; - Checking the completeness and accuracy of additions and disposals of PPE, by tracing respective contracts, underlying invoices and cash payments to significant changes in the PPE register and vouching significant changes to respective source documents; Reconciliation of the information from the PPE register with the respective disclosures in the financial statements; Management Report Management is responsible for the Management Report. The Management report will not include the consolidated financial statements nor our auditors' report thereon. The Management Report is expected to be made available to us after the date of this auditors' report. Our opinion on the consolidated financial statements does not cover the Management Report and we will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the Management Report when it becomes available and, in doing so, consider whether the Management Report is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated and whether it contains all information required by and is compliant with the Law of Georgia on Accounting, Reporting and Auditing. Responsibilities of :'\lanagement and Those Charged "ith Go\Crnance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group's financial reporting process.

6 Independent Auditors' Report Page4 Auditors' Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our

7 Independent Auditors' Report Page5 auditors' report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditors' report is: Andrew~~4 KPMG Georgia LLC Tbilisi, Georgia 26 June 2018 \

8 Consolidated Statement of Financial Position as at 31 December GEL Note Assets Property, plant and equipment , ,511 Prepayments for non-current assets 13 59,535 - Intangible assets 1,136 1,129 Finance lease receivable 14 62,873 59,037 Loans given 15 12,041 - Trade and other receivables 16 21,169 20,721 Equity accounted investees 7 15,480 12,640 Non-current assets 950, ,038 Loans given 15-2,651 Inventories 12,412 10,928 Taxes other than on income - 3,659 Prepayments 13 50,791 48,521 Trade and other receivables , ,735 Term deposits - 75,129 Cash and cash equivalents , ,609 Current assets 709, ,232 Total assets 1,659,842 1,581,270 Equity 18 Share capital 624, ,093 Additional paid in capital 71,718 71,718 Fair value reserve for non-cash owner contributions (282,181) (282,181) Retained earnings 428, ,778 Equity attributable to owners of the Company 843, ,408 Non-controlling interests 23 69,063 40,186 Total equity 912, ,594 Liabilities Loans and borrowings , ,806 Non-current liabilities 637, ,806 Loans and borrowings 20 78, ,593 Trade and other payables 21 29,254 64,410 Current tax liabilities Provisions 2,065 2,065 Current liabilities 109, ,870 Total liabilities 747, ,676 Total equity and liabilities 1,659,842 1,581,270 The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 12 to 44. 8

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10 Consolidated Statement of Changes in Equity for 2017 Attributable to owners of the Company Fair value reserve for non-cash owner 000 GEL Share capital Additional paid in capital contributions Retained earnings Total Noncontrolling interests Total equity Balance at 1 January ,901 71,718 (282,181) 270, ,346 43, ,859 Profit and total comprehensive income for the year ,364 81,364 (3,327) 78,037 Transactions with owners of the Company Contributions and distributions Dividends (see note 18(c)) (12,676) (12,676) - (12,676) Distribution of non-cash assets, (74,818) (74,818) - (74,818) net of tax Increase in share capital 6, ,192-6,192 (see note 18 (a)) Total contributions and 6, (87,494) (81,302) - (81,302) distributions Balance at 31 December ,093 71,718 (282,181) 264, ,408 40, ,594 Balance at 1 January ,093 71,718 (282,181) 264, ,408 40, ,594 Profit and total comprehensive income for the year , ,529 28, ,406 Transactions with owners of the Company Contributions and distributions Dividends (see note 18(c)) (27,313) (27,313) - (27,313) Increase in share capital (see note 18 (a)) 7, ,823-7,823 Total contributions and distributions 7, (27,313) (19,490) - (19,490) Balance at 31 December ,916 71,718 (282,181) 428, ,447 69, ,510 The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 12 to

11 Consolidated Statement of Cash Flows for GEL Note Cash flows from operating activities Cash receipts from customers 759, ,142 Cash paid to suppliers and employees (513,090) (490,150) Value added tax refund from the State - 3,500 Cash from operations before income taxes and interest 246, ,492 - (12,341) Interest paid (46,073) (42,913) Interest received 31,774 22,848 Net cash from operating activities 231, ,086 Cash flows from investing activities Acquisition of property, plant and equipment, including advances paid (82,889) (53,115) Decrease in term deposit 69,129 - Repayment of loans given 2,442 41,015 Loans given (10,883) (39,858) Acquisition of equity accounted investee (740) (8,942) Net cash used in investing activities (22,941) (60,900) Cash flows from financing activities 20 Dividends paid (27,313) (12,676) Proceeds from borrowings 69, ,431 Repayment of borrowings (130,227) (450,154) Net cash (used in)/from financing activities (87,626) 87,601 Net increase in cash and cash equivalents 121, ,787 Cash and cash equivalents at 1 January 391, ,088 Effect of exchange rate fluctuations on cash and cash equivalents (13,982) 14,734 Cash and cash equivalents at 31 December , ,609 The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 12 to

12 Note Page Note Page 1. Reporting entity Basis of accounting Functional and presentation currency Use of estimates and judgments Operating segments Revenue Equity accounted investees Other expenses Other income Finance income and finance costs Income tax expense Property, plant and equipment Prepayments Finance lease receivable Loans given Trade and other receivables Cash and cash equivalents Equity Capital management Loans and borrowings Trade and other payables Fair values and risk management Significant subsidiaries and non-controlling interest Capital and other commitments Contingencies Related party transactions Basis of measurement Significant accounting policies New standards and interpretations not yet adopted 41 12

13 1. Reporting entity (a) Organisation and operations Georgian Oil and Gas Corporation JSC (the Company ) and its subsidiaries (the Group ) comprise Georgian Joint Stock and Limited Liability Companies as defined in the Law of Georgia on Entrepreneurs. The Company was established as a 100% state-owned enterprise by the order of the Ministry of Economy of Georgia on 21 March 2006, on the basis of three Georgian state-owned companies: Georgian International Oil Corporation JSC, Georgian Gas International Corporation JSC and Teleti Oil Company JSC. The Company s registered office is 21 Kakheti Highway, Tbilisi 0190, Georgia. The Company has been registered by Tbilisi Tax Inspection and the registration number is # 4346/007. The Group s principal activities are natural gas import, electricity generation and supply, rent of gas pipelines and oil and gas exploration and extraction in Georgia. Following the completion of the Gardabani Combined Cycle Power Plant (CCPP) construction in July 2015, electricity generation was added to the Group s principal activities. On 7 September 2015, Gardabani CCPP obtained the licence on operation for an unlimited period from the Georgian National Energy and Water Supply Regulatory Commission (GNERC) and commenced generating revenue in accordance with the deregulated tariffs on the electricity market in Georgia. In accordance with the Government of Georgia order # 475 dated 14 September 2015 Gardabani CCPP was granted the status of guaranteed capacity operator until 1 October In 2016 the Group acted as an agent for crude oil delivery from Azerbaijan to Batumi sea port in Georgia. In 2017 the Group ceased these operations. Since December 2006, when the Company has been granted the status of National Oil Company on behalf of the State of Georgia, the Company receives and sells the State s share of extracted oil and gas in Georgia in accordance with Production Sharing Agreements signed between the State and investors. (b) Business environment The Group s operations are located in Georgia, consequently, the Group is exposed to the economic and financial markets of Georgia, which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in Georgia. The consolidated financial statements reflect management s assessment of the impact of the Georgian business environment on the operations and the financial position of the Group. The future business environment may differ from management s assessment. 2. Basis of accounting (a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRSs ). 3. Functional and presentation currency The national currency of Georgia is the Georgian Lari ( GEL ), which is the Company s functional currency and the currency in which these consolidated financial statements are presented. All financial information presented in GEL has been rounded to the nearest thousand. 13

14 4. Use of estimates and judgments The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes: Note 14 Finance lease receivable determination of whether the initial arrangement contains a finance lease and the present value of the unguaranteed residual value at the end of the lease term; Note 16 Trade and other receivables determination of payment schedules for receivables from GGTC. Note 17 Cash and cash equivalents classification of term deposits with original maturities of more than three months as cash and cash equivalents; Note 23 Significant subsidiaries determination of control over subsidiaries; Note 24 Capital and other commitments assessment of the commitment related to the purchase and sale of gas. Measurement of fair values Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. The information about the assumptions made in measuring fair values is included in note 22. Further information about the assumptions made in measuring fair values is included in note 22 (a) accounting classifications and fair values. 14

15 5. Operating segments The Group has five reportable segments (six in 2016), as described below, which are the Group s strategic business units. The strategic business units offer different products and services, and are managed separately. For each of the strategic business units, the Company s General Director reviews internal management reports on at least a quarterly basis. The following summary describes the operations in each of the Group s reportable segments: _ Gas supply: Includes purchase and sale of natural gas. _ Electricity generation and supply: Includes electricity sales and guaranteed capacity fees. _ Pipeline rental: Includes rental income earned by the Group from the lease of gas pipelines to a related party, Georgian Gas Transportation Company LLC (see note 26). _ Oil transportation: Includes income from transportation of oil through the territory of Georgia. _ Upstream activities: Includes sale of oil from production-sharing arrangements. _ Oil trading: Includes agency fees from crude oil delivery from Azerbaijan to Black Sea ports in Georgia. The Group ceased this activity in Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before depreciation, personnel costs, net finance costs, other income/expenses and income and other taxes, as included in the internal management reports that are reviewed by the Company s General Director. The management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. The Company s General Director does not monitor segment assets or liabilities. (i) Information about reportable segments: Gas supply Electricity generation and supply Pipeline rental Oil transportation Upstream activities Agency fee from oil trading 000 GEL Revenue 379, , , ,377 59,847 68,487 18,315 18,047 14,153 10,478-4, , ,638 Cost of gas and oil (304,576) (308,875) (88,073) (82,266) (392,649) (391,141) Reportable segment profit before unallocated 74,984 39, , ,111 59,847 68,487 18,315 18,047 14,153 10,478-4, , ,497 costs and income tax Total 15

16 000 GEL Revenues Total revenue for reportable segments 671, ,638 Profit or loss Reportable segments profit 278, ,497 Unallocated amounts: Depreciation (37,322) (39,864) Personnel costs (17,703) (15,722) Net finance income/(costs) 14,543 (50,212) Taxes, other than on income (9,650) (10,195) Other expenses (16,468) (28,190) Other income 8,028 1,068 Share of income/(loss) of equity accounted investees 2,100 (1,964) Consolidated profit before income tax 222,465 97,418 (ii) Geographical information Majority of the Group s revenues are generated in Georgia and all non-current assets are located in Georgia. (iii) Major customer In 2017 sales to one customer in the gas supply segment represented GEL 376,671 thousand which represents approximately 56 % of the Group s total revenue (2016: GEL 345,874 thousand, 55%). In 2017 sales to one customer in electricity generation and supply segment represented GEL 109,125 thousand which represents approximately 16% of the Group s total revenue (2016: GEL 115,993 thousand, 18%). 6. Revenue 000 GEL Sale of natural gas 379, ,226 Income from electricity generation and supply 199, ,377 Income from rent of gas pipelines 59,847 68,487 Oil transportation fee 18,315 18,047 Income from crude oil sales 14,153 10,478 Agency fees from oil trading - 4,023 Total revenues 671, ,638 Income from electricity generation and supply includes the income from guaranteed capacity fees of GEL 103,166 thousand (2016: GEL 109,852 thousand) and income from electricity generation of GEL 96,545 thousand (2016: GEL 74,525 thousand). The Company rents its gas pipeline and related infrastructure to Georgian Gas Transportation Company LLC (GGTC). The rent agreement is non-cancellable and is valid until 1 January From September 2011 till 1 September 2017 the lease payments were calculated based on the volume of gas transported through the leased gas pipeline at a rate of $6.80 per 1,000 cubic metres. Since 1 September 2017 the rent fee is fixed at GEL 3,500 thousand per month. GGTC is responsible for all costs related to the repair, maintenance, operation and security of the main gas pipeline system. The Company is responsible for capital expenditures only. Transactions with related parties are disclosed in note 26. Oil transportation fee is received for the oil transit from Azerbaijan to Turkey through the Baku- Supsa pipeline. 16

17 7. Equity accounted investees During the year ended 31 December 2017 Georgian Energy Development Fund JSC decreased the charter capital of its subsidiary Kartli Wind Power Station LLC from 57.15% to 50.1%, which in turn resulted in an increase in the Group s share to 49.99% and amounted to GEL 14,435 thousand (2016: GEL 14,322 thousand, 42.85%). Kartli Wind Power Station LLC constructed the first wind power station in Georgia with a capacity of 20.7 MW. The construction of the station was completed in September 2016 and started operation from November GEL Balance at 1 January 12,640 5,663 Contributions made 740 8,941 The Group s share of profit/(loss), net of income tax 2,100 (1,964) Balance at 31 December 15,480 12, GEL Percentage ownership interest 49.99% 42.85% Non-current assets 66,212 68,563 Current assets 17,796 22,767 Non-current liabilities (48,478) (47,863) Current liabilities (7,589) (15,786) Net assets (100%) 27,941 27,681 Group s share of net assets 13,968 11,861 Revenue 14,106 - Profit/(loss) and total comprehensive income/(loss) (100%) 4,200 (4,584) Group s share of profit/(loss) and total comprehensive income/(loss) 2,100 (1,964) Additionally, Georgian Oil and Gas Corporation JSC owns an interest in International Pipeline Company Samartia LLC and an interest in AGRI LNG Project Company LLC, both constituting significant influence. Based on the order # 775 of the Government of Georgia on 13 April 2017, Georgian Oil and Gas Corporation JSC can participate in the implementation of White Stream and Trans-Caspian Gas Pipeline projects. Based on the annual Partnership Meeting held on 9 July 2017, Partners of Samartia made the decision to increase the charter capital of Samartia LLC. Based on the above-mentioned decision, cash paid for the acquisition of equity accounted investees equalled to GEL 740 thousand. None of the Group s equity accounted investees are publicly listed entities and consequently do not have published price quotation for shares. 17

18 8. Other expenses 000 GEL Transportation, materials, repair and maintenance 6,434 9,822 Regulatory fees 2,091 2,595 Legal fees 1, Office expenses 1,231 1,649 Representative and business trip expenses Benefits to employees Professional services * Write off and disposal of assets 97 - Impairment loss on trade receivables - 8,818 Pre-feasibility study cost - 1,428 Other 3,404 2,560 16,468 28,190 *The professional services above include fees paid to the audit firm of about GEL 62 thousand, for the provision of audit and other professional services. 9. Other income 000 GEL Reversal of impairment loss on trade receivables 1,340 - Excess inventory identified through stock count 1,176 - Oil processing Other 5, ,028 1, Finance income and finance costs 000 GEL Recognised in profit or loss Interest income on bank deposits 36,453 24,037 Interest income on loans given 495 5,904 Customer late payment penalty interest 20,851 27,751 Net foreign exchange gain 6,797 - Unwinding of discount on finance lease receivable (note 14) 3,836 3,613 Finance income 68,432 61,305 Interest expense on loans and borrowings (48,695) (48,049) Loss on derecogntion of financial asset (see note 16) (5,194) - Net foreign exchange loss - (50,413) Early redemption fees - (13,055) Finance costs (53,889) (111,517) Net finance income (costs) recognised in profit or loss 14,543 (50,212) 18

19 11. Income tax expense (a) Amounts recognized in profit or loss The Groups applicable tax rate is the income tax rate of 17.64% (2016: 15%) applicable to Georgian companies. 000 GEL Current tax expense Current year ,333 Under provided in prior years 1, ,059 19,059 Deferred tax benefit Origination and reversal of temporary differences Total tax expense 2,059 19,381 (b) Reconciliation of effective tax rate: GEL % 000 GEL % Dividend declared / Profit before tax 27, , Income tax expenses at applicable tax rate 4, , Set off of the tax payable on dividends * (4,429) (16) Under provided in prior years 1, Change in recognised deductible temporary differences due to change in the legislation ** Differences' between tax and IFRS bases of income and expenses - - 3, , , * Set off of the tax payable on dividends relates to corporate income tax paid on the undistributed earnings in the years 2008 to ** Reversal of previously recognized deferred tax asset and liabilities of GEL 322 thousand is attributable to changes in Georgian tax legislation. On 13 May 2016 the Parliament of Georgia passed a bill on corporate income tax reform (also known as the Estonian model of corporate taxation), which mainly moves the moment of taxation from when taxable profits are earned to when they are distributed. The law is effective for tax periods starting after 1 January Considering that the change in the Georgian Tax Code was enacted before the reporting date, the Company has recognized the full effect of the change by derecognizing previously recognized deferred tax asset through the previous period statement of profit or loss as an income tax expense. 19

20 12. Property, plant and equipment Gas and oil pipelines Land and buildings Electricity Generating unit Oil wells Georgian Oil and Gas Corporation JSC Plant and equipment Other Under construction and uninstalled equipment 000 GEL Total Cost Balance at 1 January ,482 37, ,563 29,864 18,479 7,589 39, ,068 Additions 174 5, ,796 55,253 63,162 Transfers ,896 5, (10,194) - Disposals (335) (117) (3,555) - (581) - (1,680) (6,268) Reclassification (10,672) ,672 - Balance at 31 December ,649 43, ,904 35,404 19,010 9,758 93, ,962 Balance at 1 January ,649 43, ,904 35,404 19,010 9,758 93, ,962 Additions 8, ,229 41,779 Transfers 13,054 (352) (13,860) - Disposals (683) (118) - - (73) (11) (695) (1,580) Reclassification (603) Balance at 31 December ,797 44, ,429 35,404 19,778 10, ,834 1,024,161 Depreciation and impairment losses Balance at 1 January ,990 5,752 7,065 22,540 6,769 3, ,804 Depreciation for the year 19, ,152 1,683 2, ,758 Disposals - - (111) (111) Transfers to uninstalled equipment (6,270) ,270 - Balance at 31 December ,964 6,496 22,106 24,223 9,109 4,283 6, ,451 Balance at 1 January ,964 6,496 22,106 24,223 9,109 4,283 6, ,451 Depreciation for the year 17, ,291 1,207 1,805 1,115-37,868 Disposals (529) (26) - - (11) (11) - (577) Transfers to uninstalled equipment (5) - Balance at 31 December ,114 7,246 37,397 25,430 10,903 5,387 6, ,742 Carrying amounts At 1 January ,492 31, ,498 7,324 11,710 3,901 39, ,264 At 31 December ,685 37, ,798 11,181 9,901 5,475 87, ,511 At 31 December ,683 36, ,032 9,974 8,875 5, , ,419 20

21 Uninstalled equipment represents GEL 61,635 thousand from the balance (2016: GEL 37,074 thousand) of GEL 104,569 thousand, assets under construction and uninstalled equipment. Uninstalled equipment consists of gas pipelines and turbines not yet put into use. Since the Georgian market is not developed, it is almost impossible to buy parts for thermal power plants quickly in urgent situations, hence the Company has to keep additional stock. Assets under construction mostly contains the construction / rehabilitation works related to the gas pipelines. During 2017 the Government of Georgia contributed gas pipelines of GEL 7,421 thousand, land plots of GEL 313 thousand and inventories of GEL 89 thousand (2016: gas pipelines of GEL 174 thousand, land plots of GEL 4,611 thousand, plant and equipment of GEL 363 thousand and intangible assets of GEL 1,044 thousand) in the form of an increase in share capital. The nominal value of these assets approximates their fair value. 13. Prepayments 000 GEL Non-current assets Prepayments 59,535 - Total non-current 59,535 - Current assets Prepayments 50,791 48,521 Total current 50,791 48, ,326 48,521 On 28 September 2016 the agreement was signed on engineering, procurement and construction of Gardabani II combined cycle thermal power plant, between Gardabani II LLC and China Tianchen Engineering Corporation. The completion period is 24 months from the commencement date. GEL 59,535 thousand was paid as an advance payment in accordance with the above agreement and is classified as a non-current asset. Short term prepayments are made mainly to South Caucasus Pipeline Option Gas Company Limited GEL 31,136 thousand (GEL 29,271 thousand in 2016) and to Azerbaijan Gas Supply Company Limited (AGSC), GEL 11,636 thousand, (GEL 12,216 thousand in 2016) for the supply of gas. 14. Finance lease receivable In 1996, the Government of Georgia entered into a 30 year arrangement with a consortium of oil companies that undertook the construction and development of an oil pipeline system from the Georgian-Azerbaijan state border to the Supsa oil terminal on the Georgian Black Sea coast. The arrangement granted the oil companies the right to transport oil across the territory of Georgia through that pipeline system that became the property of the Government of Georgia. The ownership of this pipeline was transferred to the Company in June-July 2010 as a contribution to the charter capital of the Company at a nominal value of GEL 269,299 thousand. In exchange for the oil companies using the pipeline, the Group receives a transit fee for each barrel of oil transported. Management has determined that the initial arrangement contained a finance lease at inception date, as the lease agreement transferred substantially all of the risks and rewards incidental to ownership to the lessee. The Group has recognized the finance lease receivable of GEL 39,229 thousand at the date when the title of the pipelines was transferred to the Group. The finance lease receivable is the present value of the net investment in the lease comprising the present value of the assets unguaranteed residual value at the end of the lease term discounted at the interest rate implicit in the lease. The difference 21

22 of GEL 230,070 thousand between the nominal and the present value of the net investment in the lease has been recognised in equity as a fair value adjustment for non-cash owner contributions. 000 GEL Finance lease receivable at 1 January 59,037 55,424 Unwinding of discount on finance lease receivable 3,836 3,613 Finance lease receivable at 31 December 62,873 59,037 Contingent rent related to oil transportation recognized in the consolidated statement of profit or loss and other comprehensive income during 2017 amounted to GEL 18,315 thousand (2016: GEL 18,047 thousand). 15. Loans given 000 GEL Non-current assets Loan given to shareholder 12,041 - Total non-current 12,041 - Current assets Loan given to third party - 2,651 Total current - 2,651 12,041 2,651 The loan outstanding as at 31 December 2016 was fully repaid during The loan given to the shareholder, JSC Partnership Fund, is unsecured subordinated loan and denominated in USD, bears the contractual interest rate of 9.5% per annum and matures within 4 years. Based on the agreement between JSC Partnership Fund and the Company, the loan given by the Company will be repaid a) no later than 31 May 2021 or b) the date falling 6 months after JSC Partnership Fund pays its debt to a third party in full the later of (a) and (b) is considered as the repayment date. The Group s exposure to credit risks and impairment losses related to loans are disclosed in note Trade and other receivables 000 GEL Non-current assets Trade receivables 21,169 20,721 Total non-current 21,169 20,721 Current assets Trade receivables 144, ,345 Other receivables 2, Total current 147, , , ,456 On 16 November 2017, the Company and Georgian Gas Transportation Company LLC signed an agreement on restructuring the receivable related to the rent of the main gas pipeline. The counterparties agreed a payment schedule, based on which the total amount will be repaid by the end of The restructuring of the receivable signifies a substantial modification of terms, therefore, at the date of the restructuring, the Company derecognized the existing receivable and recognised a new asset according to the new terms, the difference of GEL 5,194 thousand being recognized as a 22

23 loss on derecogntion of a financial asset in the statement of profit or loss and other comprehensive income. The fair value of the balance is calculated based on the present value of future payments at the market interest rate of % (Note 10). The Group s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in note Cash and cash equivalents 000 GEL Cash and cash equivalents 203, ,902 Call deposits 295, ,543 Restricted cash Cash and cash equivalents in the consolidated statement of cash flows and in the consolidated statement of financial position 498, ,609 Call deposits represent term deposits with banks with maturities greater than three months from the acquisition date but for which the Group has the unilateral right to withdraw the deposits within a few days of providing notification without incurring significant penalties or loss of interest. Consequently, these term deposits have been classified in accordance with their nature which is that of a call deposit. The Group s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note Equity (a) Share capital Number of shares unless otherwise stated Ordinary shares Par value GEL 20 GEL 20 On issue at 1 January 30,854,651 30,545,028 Issue of shares in exchange for non-cash assets contributed 391, ,623 On issue at 31 December 31,245,797 30,854,651 Ordinary shares The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Company. (b) Additional paid in capital Additional paid in capital represents benefits provided to the Group by the Government of Georgia acting in its role of the shareholder. (c) Dividends and other distribution to shareholders In 2017 dividends of GEL 27,313 thousand were declared and paid (2016: GEL 12,676 thousand were declared and paid). 23

24 Based on the Order # 531 issued by Government of Georgia on 27 March 2012, related to the distribution of net profit of the Company, from the net profit generated by the Company during , the maximum amount that can be distributed is 35% of net profit. From 2018 the intention of Management is to keep paying dividends up to 35% of consolidated net profit in future years. (d) Non-controlling interests Non-controlling interest represents the Partnership Fund JSC s contribution to the charter capital and its share of the cumulative retained earnings of Gardabani TPP LLC, a subsidiary of the Group (see note 23). 19. Capital management The Group has no formal policy for capital management but management seeks to maintain a sufficient capital base for meeting the Group s operational and strategic needs, and to maintain confidence of market participants. This is achieved with efficient cash management, constant monitoring of the Group s revenues and profit, and long-term investment plans mainly financed by the Group s operating cash flows. With these measures the Group aims for steady profits growth. There were no changes in the Group s approach to capital management during the year. Neither the Company nor its subsidiary are subject to externally imposed capital requirements. 20. Loans and borrowings This note provides information about the contractual terms of the Group s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Group s exposure to interest rate, foreign currency and liquidity risk, see note GEL Non-current liabilities Unsecured bond issue 637, , , ,806 Current liabilities Unsecured loans 67,512 - Current portion of unsecured bond issue 11, ,593 78, , , ,399 (a) Terms and debt repayment schedule Terms and conditions of outstanding loans were as follows: Nominal interest rate 31 December December 2016 Year of Face Carrying Face Carrying 000 GEL Currency maturity value amount value amount Loan from banks USD 5.000% ,979 12, Loan from banks USD 6.500% ,533 54, Unsecured bond issue USD 6.750% , , , ,968 Unsecured bond issue USD 6.875% , ,431 Total interest-bearing liabilities 715, , , ,399 24

25 In May 2017 the Group repaid in full the remaining part of the Eurobonds issued in May In April 2016 the Group carried out the issuance, placement and registration (listing) on the London Stock Exchange of unsecured bonds of USD 250 million and the early part-redemption of the 2012 Bonds. (b) Reconciliation of movements of assets and liabilities to cash flows arising from financing activities Retained earnings Liabilities Retained Loans and 000 GEL earnings borrowings Total Balance at 1 January , ,399 1,067,177 Proceeds from borrowings - 69,914 69,914 Repayment of borrowings - (130,227) (130,227) Dividend paid (27,313) - (27,313) Total changes from financing cash flows (27,313) (60,313) (87,626) The effect of changes in foreign exchange rates - (28,808) (28,808) Interest expense - 48,695 48,695 Interest paid - (46,073) (46,073) Total liability-related other changes - (26,186) (26,186) Total retained earnings-related other changes 191, ,529 Balance at 31 December , ,900 1,144, Trade and other payables 000 GEL Trade payables 19,619 63,224 Payables for non-current assets 9,634 1,143 Other payables ,254 64,410 The Group s exposure to currency and liquidity risk related to trade and other payables is disclosed in note Fair values and risk management (a) Accounting classifications and fair values The estimates of fair value are intended to approximate the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. However given the uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realisable in an immediate sale of the assets or transfer of liabilities. The Group has determined fair values of financial assets and liabilities using valuation techniques. The objective of valuation techniques is to arrive at a fair value determination that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The valuation technique used is the discounted cash flow model. Fair value of all financial assets and liabilities is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. 25

26 Management s estimate of the fair value of the unsecured bonds yielded a range of values from a fair value approximately equal to the carrying amount to a fair value approximately 8% higher than the carrying amount. Although unsecured bonds are listed in London Stock Exchange, the market is not considered as active, as the participants are mostly institutional investors and turnover on the market is not high. The carrying values of other financial assets and liabilities of the Group are a reasonable approximation of their fair values. (b) Financial risk management The Group has exposure to the following risks from its use of financial instruments: credit risk (see (b)(ii)); liquidity risk (see (b)(iii)); market risk (see (b)(iv)). (i) Risk management framework The Supervisory Board has overall responsibility for the establishment and oversight of the Group s risk management framework. The Group s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group s activities. (ii) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group s receivables from customers, loans given, term deposits and cash and cash equivalents. The carrying amount of financial assets and prepayments represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was as follows: Carrying amount 000 GEL Trade and other receivables * 168, ,456 Prepayments 110,326 48,521 Loans given 12,041 2,651 Term deposits - 75,129 Cash and cash equivalents 498, , , ,366 *The balance contains long term receivable from GGTC of GEL 21,169 thousand (see note 16). Trade and other receivables Credit risk is managed by requesting prepayments from customers or assessing their creditworthiness prior to extending credit. No collateral in respect of trade and other receivables is generally required. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. 26